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Commanding the 13,500-member crew is Bill McNabb, chief executive of one of the world’s largest, most influential financial services companies, with $2 trillion under management and 25 million investor accounts.

Because of its size, Vanguard’s influence on everything from equity markets to corporations to regulation extends far beyond the Mid-Atlantic. You wouldn’t know it from the mild, unassuming McNabb, who loves the liberal arts, takes commercial flights and relaxes by competing in endurance races.

The 55-year-old has enjoyed a meteoric rise since he joined Vanguard in June 1986. He became vice president of marketing services in 1989, assumed responsibility for all institutional sales activity in 1991 and became head of Vanguard’s Institutional Investor Group in 1995. Now, he’s only the third chief executive in Vanguard’s history, after founder John C. Bogle and Jack Brennan.

This transcript of our hour-long conversation was edited for length and clarity.

Europe is in a recession. And if it deepens, the biggest thing is it’s hard to predict what the impact in equity markets is going to be in the short run. The only thing you can expect with any certainty is the volatility is going to continue.

I think the most important element in our markets over the next few years is controlling, in a sense, what we can control in U.S. markets. And that would be the debt-deficit situation. If the U.S. has a credible plan to get its fiscal house in order — by the way, it doesn’t have to happen overnight, either. We don’t have to go to a balanced budget tomorrow. But if there’s a plan that people can extrapolate and say we’re on a good path there, it will remove so much of the uncertainty from the market.

And, very importantly, will give us the greater ability to withstand other exogenous shocks, whether from Europe or China or whatever. We can’t control Europe. We can’t control the Chinese economy. But we can control our fiscal situation.

So are you bullish on the economy?

I am neutral on the U.S. in the short run until this issue gets resolved. I am actually very bullish over the long run.

Ours is still is the most vibrant economy in the world. If you look, one of the best correlations to GDP growth is growth of the employee base. And over the next 20 years at our employee base, the number of working people will actually grow more here than anywhere in the developed world, with the exception of India. Despite the K-through-12 issues on education, we still have the best university system in the world.

And we still have the most powerful military. Again, these are real macro factors. But if you look at 200 years of history, sea power — the correlation between who controls the seas has a huge impact on economic growth and prosperity. Because when you think about it, still 94 percent of all trade occurs over the oceans. So us having the most credible navy is a positive factor.

I think energy . . . could be the equivalent of the peace dividend.

I’m actually pretty optimistic about the U.S. in 2020.

With the competition for returns from private equity, hedge funds, computerized trading, quants, LBOs, whiz kids and all the other geniuses, how do you assure the “little guy” about investing his savings in a 401(k) and that buy-and-hold still works?

It’s a little bit scary when you look at all these conversations around quantitative methods. We think we help the little guy compete. We’ve got very sophisticated people facing off against all these sophisticated constituencies that are out there on behalf of the investor.

This is an old example: indexing. There’s kind of a mythology out there, somewhat perpetuated by us, that we invented indexing.

We didn’t invent indexing. Indexing was invented on the West coast in 1971 by Wells Fargo investment advisers. They created an index portfolio for a pension client. We took the idea and said, “Gee, what’s good for big pension clients . . . why can’t it be good for the investor with $1,000 or $3,000?”

So our genius wasn’t so much the idea of indexing. It was applying an institutional concept to the retail investor. A lot of the work we do in different funds or advice or so forth is trying to give what I call institutional sophistication to retail investors so they can benefit from it.

It’s being constantly changed as you’re aging. Probably the most important element is it’s being rebalanced on a regular basis.

When the tremendous downturn occurred in 2008 and early 2009 and equities were losing value, what were target-date funds doing? Their bond portions were getting to be disproportionately large, so [fund managers] would see in a sense that bond prices were going up, and they were selling. So [fund managers] were reaping the gains there, and they were plowing it back into equities at very low prices.

Most individual investors don’t have the discipline to do that on their own. We do recordkeeping for about 4 million participants in 401(k) plans. The [market] peaked in October 2007, when the stock market was at 14,000, and then you went through this horrific downdraft. Our average participant was back to whole by the end of 2009, early 2010. Now, 90 percent are ahead.

Are those gains because stock prices have risen?

And contributions [to the plans] at cheaper prices. Now, is it phenomenal returns? No. You put it in the context of what was going on.

The people I feel horrible for [are the ones who were] planning on retiring at the end of 2008. I had a plan sponsor say, “Bill, how do you answer this question? My participants said, ‘I’ve contributed to my plan for 25 years. I’ve done everything you told me. I’ve been balanced and diversified. I was going to retire at the end of the year, and my account’s down 25 percent.’ ”

What was your answer?

I said, “Joe, you’ve got to just be very honest. You’ve got to say there’s nothing that you could have done. You needed to be fully invested. You needed to be fully diversified. So either you oversaved, and in a sense, your portfolio could withstand this. But if you didn’t, your standard of living isn’t going to be what you thought it was going to be. Or you’re going to have to work a couple of extra years.” It is what it is. The only way to do it is to be brutally honest, and we’re always talking to people about saving more than you think you should.

How much is that?

There’s a commercial out there that says, “What’s your number” for retirement? The problem is if the number is what you actually think, plus 25 percent, that’s fine. But a lot of people will think, “If I get to a million dollars, that’s a lot of money. That’s $40,000 a year in income. I add that to Social Security and some other stuff, I can live really comfortably.” But if they only get to $800,000, that’s $32,000 a year. That’s a 20 percent hit to income. Can you take that?

If you really think you need to be at $1 million, at a minimum get to $1.2 million. And it’s hard. Wages haven’t been growing. Starting early is really key.

For people who do have those nest eggs, many are not qualified to turn that lifetime savings into an income stream. What do you recommend?

The path that makes sense for a lot of people is maintaining a highly diversified portfolio and then withdrawing systematically from it.

That takes a ton of discipline. Our managed payout funds haven’t really taken hold in the marketplace in a big way, yet. But I think the concept was correct. It’s like running a self-endowment, and that’s the mentality you need to bring.

I received documents in the mail about fee disclosure rules for tax-deferred retirement plans, and I could not understand them. What’s the point?

In general, we think more disclosure is good. I think there’s some risk that the new rules are overly complicated and participants are going to be overwhelmed.

So the requirements are spiritually correct, but the actual implementation, the way the rules are written, could use some work. And we’re going to keep working on it. We think costs are really a big deal. People should know what they’re getting.

They come to us for a few reasons. One, we’ve become a brand people can trust.

Many of our clients can’t explain our ownership structure. But they get the benefits of it. The fact that we only exist for investors. That has a lot of cachet.

The way to think about it is we’re almost like a big cooperative. And the funds own us. And if you’re therefore an investor in the funds, you’re indirectly an owner. We don’t have separate stockholders. We don’t have a family that owns us.

I own as much of Vanguard as I have invested in Vanguard, which is my entire net worth.

So it’s a concept that you only serve this one constituency. Increasingly investors look at other firms and they say, “There’s a conflict here. These guys aren’t always acting on my behalf.”

Where do you invest your money and why?

I’m very diversified.

In Vanguard funds?

Oh, yeah. I own both index and active [funds]. If you looked at my portfolio, it would look like the market, probably a little higher equity concentration than somebody my age would normally have.

Why do you have more equity at your age of 55?

I’m very optimistic about life span. I had two grandparents who lived into their 90s. And my parents are really healthy and they’re both 80. So [knocks on wooden conference table] I don’t have as much in fixed income as would be normal. And I’m very global. Everybody should on their equity side be 30 percent minimum [invested] overseas.

How do you compete on pay, status, et cetera, when recruiting? Can a fund manager make $1 million working for Vanguard?

[He nods yes.] We’ve got to be competitive. We have the best fixed-income people in the world. We’ve got to pay them really well. When the compensation consultants look at us, our total numbers always measure up competitively. But our makeup is very different. We have much less in base [salary] and much less in short-term incentive. And much more in long-term incentive.

What recommendations do you have for people who are thinking of entering the financial services industry?

Make sure you have a passion for it. Don’t do it for the money. Don’t do it for the prestige. Do it because you love investing in companies. Or if you’re in the fixed-income side, [because you love] investing in bonds.

Expect to work really, really hard if you’re going to be good.

Ed Owens [who has announced his retirement from the Vanguard Health Care Fund], began running that fund in 1984. If my data is correct, from 1984 until today, that fund is the best-performing mutual fund in the world. It’s a $22 billion fund. Ed is incredible. One of these guys, so focused. So disciplined. Unflappable. He’s seen it all. Think about it, of what we’ve gone through. A lot of wars. And that to me is what you need.

So passion is the most important personal characteristic?

The first thing is this passion for what they do. It really comes out.

You would say, “Well, that’s obvious.” But there are a lot of people who do it because they’re smart. It’s a high-paying profession. They like it. They don’t love it. When we interview prospective managers, we really probe on this, and it’s a little bit of an art in terms of discerning it.

You’ve got to be smart. You’ve got to work really hard.

The great Peter Lynch [of rival mutual fund group Fidelity] . . . he said every Sunday morning instead of going out and playing golf, he read 10 annual reports. He said over the course of a year, that was 500 annual reports that he read that somebody else didn’t read. I think there’s something to it.

What other qualities do you see in great money managers?

A tremendous curiosity. I’ve seen guys who were really, really smart and really disciplined but they didn’t have this innate curiosity about, “Why does this work? Why is this company doing this?”

What is the worst idea to come out of the investment world during the last 10 years?

There were so many bad ideas. Certainly one is the structured investment vehicles that so many funds invested in. You were packaging up all these components, bond components, and they get AAA ratings. Yet when you look at the underlying tranches, they weren’t AAA.

We avoided them in our money funds and our bond funds. We weren’t lucky. We knew exactly what we were doing. Those were really not good ideas.

I tell you what I’m worried about. There is a tremendous amount of product proliferation going on right now. You can see it in most of the exchange-traded-fund area. People are slicing the markets into very narrow compartments. They are implying you should time the market to take advantage of this slice. It’s a horrible thing for investors. Investors tend to be always too late to some little sector movement.

There’s not a single worst idea. It’s a whole group of them. Just look at some of the new EFTs introduced. Just by their names, you go, “Why would anybody introduce this?” It’s just encouraging all the wrong things.

What is the best idea?

Target retirement funds. They are in­cred­ibly simple to understand, yet in­cred­ibly sophisticated underneath. Obviously, I think ours are the best. A couple of our competitors do it really well, also. I think 401(k) participants are much better off as a result.

You’ve got a fairly stressful job. What do you do to relax?

It’s mostly family time and exercise. I’m kind of an endurance person.

What kind of endurance? Marathons? Running? Triathlons? Rowing?

I do a little of each, actually. Season by season. . . . A lot of cycling these days. Every summer, this is the first summer I missed it in 12 years, I do a two-day, 200-mile bike ride in Massachusetts to raise money for cancer. Then in the fall, I’ll try to do one masters rowing race. In the spring, I’ll try to do a couple of running races or a triathlon. So as a couple of my friends said to me, “You have athletic [attention deficit disorder].” I just try to mix it up.

Describe your day.

I get up at 5 a.m. I’m usually in the office by 5:45. It’s get up, get dressed, go to work, pick up a cup of coffee. Spend the first couple of hours usually scanning the news, different Web sites. See what’s going on in Europe, Asia, so forth. Catching up on e-mail. Getting my day set. My days really vary, depending on what’s going on. Many days, we’ll have one of our active managers coming through. I may sit down for and hour and a half with each of the teams. There’s usually no shortage of meetings around strategy issues or business issues come up.

Do you travel much?

I travel for work. My wife loves to travel, but you spend enough times on planes.

What do you read?

I read a lot of fiction now. Some junk. Some fun. Then some serious. I read one of the bestsellers, “Gone Girl.” It’s a thriller.

I really like biographies when they are really well done. I’m reading [Walter] Isaacson’s Steve Jobs book. When [David] McCullough came up with “1776” a few years ago, I probably read that twice. I just found that in­cred­ibly useful.

Which business leaders do you respect the most?

I’ll pass. I will get myself in trouble.

What is the best idea to come out of the financial investment world of the last 10 years?

Target retirement funds. They are in­cred­ibly simple to understand, yet in­cred­ibly sophisticated underneath. Obviously, I think ours are the best. A couple of our competitors do it really well, also. I think 401(k) participants are much better off as a result.

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